Welcome to the RFF Weekly Policy Commentary, which is meant to provide an easy way to learn about important policy issues related to environmental, natural resource, energy, urban, and public health problems.

This week’s commentary by Charles Howe discusses problems associated with water laws in western states. Ideally, during drought periods, scarce surface and ground water resources should be allocated to their most valued uses. This is why economists advocate allocating water resources through markets, which would enable those who value the water most, and are therefore willing to pay the most, to acquire water rights. For many years these markets were sporadic but did serve to move water to higher-valued users. Since the 1960s, water markets have been much more active and it is increasingly easy to buy and sell water rights as well as short term leases through institutional innovations like "water banks."

Next week’s commentary by Cliff Winston will focus on policy issues related to airline infrastructure.

Is There a Conflict Between Western Water Law and Efficient Use of Water Resources?

Charles W. Howe

While the very idea of “water law” and “water courts” may sound odd to someone on the East Coast, where rainfall is abundant, throughout the West, having access to and the right to use water is both complicated and extremely political. For example, the Colorado River crosses seven states, from Wyoming to California, and is a major source for both agricultural and municipal needs all along the way.

Water laws are embedded in the constitutions of western states, and each water right has a priority attached to it. Seniority or priority (“the prior appropriation doctrine”) is assigned according to when rights to surface or groundwater were first granted over 150 years ago, as the West was being settled. Today, water rights can be leased or sold, and the initial priority remains part of the right. For example, in the South Platte Basin of Colorado, many surface diversions for irrigation date back to the mid-19th century and are thus quite senior. If low stream flows prevent senior rights from diverting water to which they are entitled, the seniors can “put a call” on the river, requiring all rights “junior” to the caller to stop diverting water until adequate streamflow is restored. River calls almost never occur during wet periods but can be continuous during a drought.

Two basic tenets of western water law are that the water claimed under the right must be put to beneficial use, and that when water rights are leased or sold for new uses, there must be “no injury” to other water users. In some ways, historically, these tenets have conflicted with the efficient allocation of water. For many decades, the interpretation of beneficial use did not include instream uses to sustain fish populations, riparian (streamside) ecosystems, or recreation. Only recently has it become possible to dedicate water rights to these purposes. The no injury requirement has been interpreted too narrowly by the courts to recognize degradation of water quality from transfers as an injury. In Colorado, only in the last year have the water courts (a division of the state judicial system, akin to the criminal or civil branches) been permitted to consider water quality effects when reviewing proposed transfers.

Charles Howe, is an Emertius Professor of Economics at the University of Colorado, Boulder and is a team member of Western Water Assessment. He specializes in water markets and pricing.

Recent conflicts between surface water users and groundwater users in Colorado and Idaho raise serious questions about the way in which water rights are administered through “river calls.” In the South Platte Basin of Colorado, 445 major agricultural wells were “called out” in the summer of 2006, continuing into the summer of 2007. Wells generally are junior to many surface water users because of the late development of pumping technology. Low flows led to the call by senior downstream surface users while the wells failed to provide “make-up” water that might have allowed them to continue pumping. Many surface users were also called out.

The 2006 well shut-down turned out to be very costly, with the immediate loss of 30,000 productive acres. The impacts were felt throughout the regional agricultural community. The beneficiaries of the shut-down were the downstream agricultural users that would receive only marginal increases in water availability over a decade or more. It is clear that the present value of the costs greatly exceeded the present value of downstream benefits. A very similar situation was found in the East Snake River Plain Aquifer in Idaho.

In addition to the net agricultural losses from the call, many high-value surface users – including the Colorado cities of Boulder, Highlands Ranch, and Greeley – had to forego some of their diversions from the South Platte. It was estimated that the related losses were quite high compared to any agricultural values.

These cases suggest that, under current western U.S. conditions, river calls are very likely to be economically inefficient. Calling parties are not motivated to take into account the losses of affected juniors. And it is unlikely that juniors will get organized to pay seniors to prevent calls from being made. The underlying problem is a low correlation between priorities and values in use today: many senior rights are still being applied to low-value uses in agriculture while the water rights of expanding urban areas are quite junior.

This is where water markets can make a difference; for example, in New Mexico, Colorado, and Utah it is possible to buy and sell rights to the use of stream flows or groundwater and divert such purchases away from any riparian land. But the challenge is to make these markets more efficient and less costly to use. In Colorado, water right transfers must be reviewed by the water court to guarantee no injury to other water users, usually requiring costly engineering and legal studies. In other western states, this administrative function is typically vested in the Office of the State Engineer. This shift away from water courts should be considered by all states and by Colorado in particular. In any case, the decisions of the State Engineer are always subject to court appeal.

In most western states, “water banks” are being used to facilitate leases and permanent transfers. These programs, administered by each state, serve as clearinghouses or brokers, connecting buyers and sellers. There is extensive favorable experience with water banks in Arizona, Idaho, and other western states. While water banks still require some form of state review, that authority is generally vested in the Office of the State Engineer. Greater use of the several forms of water banks will significantly reduce the ongoing conflicts between the traditional administration of water rights and the emerging need for greater flexibility and economic efficiency in western water administration.

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Views expressed are those of the author. RFF does not take institutional positions on legislative or policy questions.

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